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A Sunday Evening Reflection on International Taxes

by Tim Schlotterer

Like many of you, I enjoy spending my Sunday evenings relaxing at home.  From time to time, I like watching the television news show, 60 Minutes.  On March 27, 2011, CBS aired the news story, A look at the world’s new corporate tax havens.

During the segment, Leslie Stahl reported that U.S. companies have managed to keep profits overseas, thus avoiding the payment of U.S. taxes on these profits.  Stahl traveled to Zug, Switzerland and visited a number of U.S. corporate headquarters.  These headquarters ended up being mailboxes or empty offices.  The story shared a glimpse at how some U.S. companies have been able to structure their company to avoid paying U.S. taxes.

The U.S. tax law currently allows companies to set up wholly-owned corporations outside the U.S.  Generally these foreign corporations will not have their profits subject to U.S. tax until money is repatriated (i.e., brought back into the United States).  Therefore, locations such as Zug, Switzerland, with a tax rate of 15-16% and Ireland, with a tax rate of 12.5% are very appealing to U.S. companies looking to lower their overall effective tax rate.

In addition to managing the overall effective income tax rate, one item that the news story failed to share is that many countries outside the U.S. offer much lower employment costs.  For example, according to the World Economic Outlook Database October 2010 edition, the Gross Annual Wage is as follows for the following countries:

  • United States    $15,080
  • Mexico               $1,753
  • Vietnam             $1,002
  • China                 $1,687
  • Japan                 $11,254
  • UK                      $22,597

As an international tax advisor, I work with clients in assisting them with the current benefits of doing business abroad.  As businesses continue to expand their market and place an emphasis on managing costs, the global market has opened an opportunity for U.S. companies to consider.  The global market cannot be ignored and in many cases is needed for U.S. companies to survive.  While GBQ does not advise clients to open up a mailbox or empty office to place their corporate headquarters, we do provide assistance with effective international tax planning.  These types of stories come up from time to time during meetings with clients.  Though sometimes unbelievable on the magnitude as shared in the 60 Minutes story or the recent announcement that GE will pay no corporate income tax on $5.1 billion U.S. profit, it cannot be ignored. In my opinion, these types of stories should be screaming a message to our current administration that the U.S. tax law needs to change to be competitive with the world market.

Rather than looking at ways to remain competitive, our current administration has placed an emphasis on closing the perceived tax benefits U.S. companies currently have by doing business abroad under the current tax laws. According to the U.S. Treasury Department, offshore tax deferral will cost the federal government approximately $213 billion over the next five years.  President Obama’s 2010 budget proposal, the President’s “Green Book”, proposes the following:

  • U.S. corporations would not be able to claim a deduction for an interest expense that is allocated and apportioned to foreign assets unless the foreign-source income from those assets are currently subject to U.S. tax.  This proposal is intended to eliminate the perceived mismatch that allows U.S. corporations to receive a current benefit from an interest deduction while deferring the income they earn abroad.
  • U.S. Corporations computing a foreign tax credit would be required to aggregate their earnings and profits from all foreign subsidiaries.  Currently U.S. Corporations generally maintain their earnings and profits separately on a foreign subsidiary by subsidiary basis.  Currently, effective tax planning can allow a U.S. Corporation to maximize their foreign tax credit by filtering tax credits through foreign subsidiaries with lower earnings and profits.

GBQ will continue to keep a pulse on the impact these matters will have on our clients.   I do think changes will occur in the next two years for U.S. companies doing business abroad.  These changes will have a significant impact on our economy and the way U.S. companies plan to do business in the future.

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